Sharp Shift In Sentiment

The last few days in markets have served as a sharp reminder of just how quickly sentiment can shift. This time last week, traders were focused firmly on the Fed and expectations that the central bank would be forced to step up the pace of its tightening schedule in order to keep track with the pace of the economic recovery and surging inflation seen in the US. Fast-forward one week and the big focus now is whether the world is about swing back into the depths of the pandemic following Friday’s announcement of a new COVID variant.

Awaiting Further Omicron News

News about the variant is widespread at this point. So far we know that it is more contagious and potentially better at escaping antibodies and potentially more resistant to vaccines. However, it is still very early stages and scientists have warned that they do not yet have enough data on the virus to declare whether it is in fact the severe threat it seemed to be when first announced last week.

Initial Market Reaction

So, with that in mind, what we are seeing currently is an initial, fear-driven, reaction from markets. However, given that so far the virus appears to be a much weaker strain, there is stull a chance that it won’t lead to the widespread return to lockdown which many fear. If this proves to be the case and the new strain is simply deemed more contagious (but, crucially, not more deadly), then markets are likely to react with swift relief, sending risk assets higher and safe haven assets lower.

The key then will be in how individual governments choose to handle the outbreak. In Europe already we are seeing a divide between countries adopting a stricter approach (such as Austria, Switzerland, Netherlands) and those taking a more relaxed approach.

Worse Case Scenario

However, if over the next few weeks the news flow worsens and the new strain proves to be more deadly than previous strains, the current market will gather pace very quickly. Risk assets will come under pressure across the board; equities, commodities, airline stocks and fuel stocks in particular, risk currencies etc. Safe haven assets will be driven sharply higher. Again, the extent to this move will depend on just how bad the new strain turns out to be and the measures it leads to. Ultimately, national lockdowns will be the most damaging events and are the big issues to keep an eye on.

Technical Views

US 10 Year Bonds

The US 10 year bond has been grinding higher within a corrective bull channel over recent weeks. Price is now testing the upper bound of the channel, having broken above the 98’31’7 level. With MACD and RSI bullish, the focus is on further upside while price holds above here. To the topside the next levels to note are 100’00’2 and 101’04’0 above.